Tag Archives: Dacheng

DENTONS STRIKES AGAIN

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[NOTE: Beginning April 16 and continuing through April 20, Amazon is running a promotion for my novel, The Partnership. During that period, you can get the Kindle version as a FREE DOWNLOAD. Recently, I completed negotiations to develop a film version of the book.]

Dentons must have a large support staff whose only job is to introduce the firm’s new partners to each other. Three months ago, it joined with the massive China-based Dacheng to create the world’s largest law firm — or whatever it is. Now McKenna Long & Aldridge’s partners will merge their 420 lawyers into the Dentons North American verein.

Well, not all 420 lawyers because, as McKenna Long’s chairman Jeffrey Haidet told the Daily Report, “There will probably be some fallout from the legacy partnership. It’s unfortunate….”

There’s nothing unfortunate about the deal for Haidet, whose personal “fallout” will make him co-CEO in Dentons-US.

Eliminating The Opposition

Haidet tried to make this deal in 2013, but according to the Daily Report, it collapsed when a few key McKenna Long partners balked over concerns about losing the McKenna identity and name. The currently prevailing big law firm business model doesn’t value such dissent. So it’s no surprise that during 2014 McKenna Long lost a greater percentage of its partners (22.3 percent) than any other Am Law 200 firm.

Haidet told the American Lawyer that some of his firm’s record-setting 59 departures last year “were of partners who disagreed with the firm’s growth strategy.” That’s not surprising either, since that strategy apparently involved extinguishing the firm itself. A venerable Atlanta institution that is also highly regarded for its Washington, DC government contracts and policy work will soon disappear.

What’s Next?

If and when McKenna Long releases its financial results for 2014, the underlying motivations behind Haidet’s renewed discussions with Dentons may become clearer. Perhaps the firm’s financial performance limited its options. But this much is obvious: Compared with McKenna Long’s earlier focus that gave it a clear identity, the partners who survive this transaction will join an organization that has an open-ended goal, namely, getting bigger.

Dentons’ global CEO Elliott Portnoy told the Wall Street Journal, “There is no logical end.” That echoed global chair Joseph Andrew’s remarks in an earlier article: “We compete with everyone. We compete with the largest law firms in the world and the smallest law firms.” Combine those two thoughts from the top of Dentons’ leadership team and it sounds like an effort to be all things to any and all potential clients.

“We’re going to be driven by our strategy,” Portnoy told the Journal. Even so, it looks like the strategy is growth for the sake of growth — a dangerous path. But as Andrew put it, they’re out to prove everybody else wrong about the perils of that approach: “What we’re trying to do is to take these myths that have gathered in the legal profession and say (they’re) not true.”

The Evidence Speaks

Andrew and Portnoy are fighting more than “myths.” Last year, the 2014 Georgetown/Thomson Reuters Peer Monitor Report on the Legal Profession devoted most of its annual report to the folly of growth alone as a business strategy. It begins by debunking the argument that increased size means economies of scale and cost savings:

“[O]nce a firm achieves a certain size, diseconomies of scale can actually set in. Large firms with multiple offices — particularly ones in multiple countries — are much more difficult to manage than smaller firms. They require a much higher investment of resources to achieve uniformity in quality and service delivery and to meet the expectations of clients for efficiency, predictability, and cost effectiveness. They also face unique challenges in maintaining collegial and collaborative cultures, particularly in the face of rapid growth resulting from mergers or large-scale lateral acquisitions.”

In addition to the quality and cultural issues discussed in my February post on the Dacheng deal, Dentons’ expanding administrative structure prompts this question: How many CEOs can a law firm have at one time? In addition to global CEO Portnoy and global chairman Andrew, Haidet will join four other current Dentons CEOs. Additional senior management will result from implementing the Dacheng deal.

Turning to the key question, the Georgetown Report notes, “[G]rowth for growth’s sake is not a viable strategy in today’s legal market. The notion that clients will come if only a firm builds a large enough platform or that, despite obvious trends toward the disaggregation of legal services, clients will somehow be attracted to a ‘one-stop shopping’ solution is not likely a formula for success.”

Compare that analysis to the Wall Street Journal’s summary of Dentons’ strategic plan: “[T]he firm hopes to become a one-stop shop for big corporations and small businesses alike.”

A Distraction?

The Georgetown Report’s most intriguing suggestion is that a law firm’s pursuit of indiscriminate growth can mask a failure of true leadership:

“Strategy should drive growth and not the other way around. In our view, much of the growth that has characterized the legal market in recent years fails to conform to this simple rule and frankly masks a bigger problem — the continuing failure of most firms to focus on strategic issues that are more important for their long-term success than the number of lawyers or offices they may have.”

As a way for law firm leaders to convince their partners that they have a strategic vision, the Report continues, growth is “a more politically palatable than a message that we need to fundamentally change the way we do our work.”

Drawing an analogy to Amity Police Chief Martin Brody’s line (delivered by Roy Scheider) in the movie Jaws, the Georgetown Report concludes, “For most firms…the goal should be not to ‘build a bigger boat’ but rather to build a better one.”

Dentons has already built an enormous boat and, as Portnoy said, “There is no logical end.” Someday soon we’ll know if it’s a better boat, and whether it even floats.

ASIA: ONE FIRM GOES BIG WHILE ANOTHER GOES HOME

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The contrasting headlines are striking. Two days after Fried Frank announced that it was pulling out of Asia, Dentons revealed that its partners had voted to jump in — big time. A week later, a ceremony that looked like a treaty-signing marked the combination of Dentons with Asia’s largest law firm, Dacheng Law Offices. The result is now a 6,600-lawyer behemoth.

A Big Bet

Dacheng and Dentons share some things in common. Both firms are themselves products of rapid inorganic growth. Dacheng was founded in 1992. Its website now boasts more than 4,000 lawyers worldwide.

Dentons resulted from transactions that combined four law firms — Sonnenschein, Nath & Rosenthal, Denton Wilde Sapte (UK), Salans (France), and Fraser Milner Casgrain (Canada) — into an organizational form known as a Swiss verein. Each firm maintains its own profit pool but shares strategy, branding, IT and other core functions. According to its website at the time of the Dacheng deal, 2,600 lawyers carried the “Dentons” brand.

But a brand is not a business, and any brand is only as good as its underlying product. Law firms have a single product to sell: the talent of their personnel. The most important challenge that comes with inorganic growth is maintaining consistent quality. In that regard and perhaps more than any other business, law firms have precious little margin for error.

In responding to anticipated questions on that subject, Dentons global CEO Elliott Portnoy framed the issue, but never really responded to it: “We know our competition will suggest that this dilutes profitability and will raise questions about quality control. But the simple truth is that we’re going to be able to generate more revenue, increase our profitability and position ourselves as a truly multicultural firm.”

The Big Question

Apart from failing to address the quality question, sound bites about multiculturalism don’t answer a central question: What will the culture of the combined organization become?

The practical differences between Dentons and Dacheng are enormous. According to The American Lawyer, average revenue per Dacheng lawyer is $78,000. In the October 2014 America  Lawyer Global 100 listing, Dentons’ RPL was $505,000. Even with separate revenue and profits pools, integrating these two giants will still be something to behold.

For example, the leadership structure of the new entity reads like the fine print on securities filing. The American Lawyer reports:

“The combined firm will also have a Chinese chair, and none of the five vereins will have a majority of board seats. Any single verein can also block a policy it doesn’t agree with. In the combined firm, the global board will be increased from 15 to 19, with five seats for the Chinese verein and the same number for the U.S. verein. Andrew says the future number of Chinese seats will be adjusted according to the verein’s revenue growth. The chair of the global board, which includes all five vereins, will be Peng; Portnoy will remain the firm’s global CEO, and Andrew will continue to be the firm’s outward face as global chair of the combined firm.”

The Big Risk

The principal question that any leader embarking on a merger of equals should ask is: What happens if it fails? Among other things, leadership requires risk management. Anticipating worst-case scenarios might lead to decisions that outsiders view as too conservative. But the downside consequence of failing to consider those scenarios can be fatal. Just ask the former partners of Dewey & LeBoeuf.

In that respect, the nearly simultaneous decision of Fried Frank to exit Asia after a nearly decade-long effort to gain traction there is interesting. That firm’s China entry began in 2006 with lateral hires from Hong Kong. A year later, it opened an office in Shanghai. But it began deliberating the fate of its Asia presence in 2009 before reaching its recent decision to leave.

According to firm chairman David Greenwald “discipline and good business judgment” led the firm to close its China offices. He deserves credit for a tough decision and forceful action. Calling the time of death on any failed effort is never easy.

In commenting to the American Lawyer about Fried Frank’s departure, law firm consultant Peter Zeughauser said, ““Nobody wants to admit defeat, but Fried Frank might be the canary in the mineshaft. China has always been a hard market, and with the local firms getting much stronger and starting to capture the lion’s share, it’s not getting any easier. Some firms will view it as a necessary investment for the future, but for others, it’s just not worth it.”

Different Approaches; Different Outcomes?

Published reports suggest that Fried Frank initially went into China hoping to capitalize on its existing relationships with U.S. clients — including Goldman Sachs and Merrill Lynch. Dentons appears to have a dramatically different strategy: joining forces with the largest of the China-based firms that Zeughauser identified as getting stronger.

Whatever else happens, the leaders of Dacheng-Dentons can say that they once presided over the largest ever lawyer branding experiment. Especially for Dentons, it involves a big bet. For the sake of everyone involved, let’s hope it’s on the right horse.